Matthew Simmons Interview: Do you recall when you started studying the peak oil story? It was sometime in the 1990s?
Simmons: I wasn’t studying the peak oil
story then. In 1989, I began pondering-as it was clear to me that the
worst was over in terms of the smashed rig count-when it would have a
deleterious impact on oil supply in the US. At that time, it hadn’t
had nearly the detrimental impact that I would have thought. We
started running correlations of wells drilled vs. reserves added. It
appeared that there was a two- or three-year lag; there’s almost a
perfect correlation of when the decline startsÖ That’s when I realized
how few people knew that if you don’t drill, it eventually shows up.
Then in the early 1990s I started hearing the first of what became a
loud chorus of commentators about how modern oil-field technology had
been the game-changer-that we only needed one rig for what we used to
do with 8 rigs because of horizontal drilling. And because of 3-D
seismic we no longer drill dry holes. Since our firm did all the
investment banking in all those technologies, I felt ‘what an
unadulterated bunch of baloney. None of this is true.’ That’s when I
started realizing that few people in the industry really appreciated
what decline rates were. So I spent an enormous amount of time during
the 1990s trying to analyze depletion data: the rates of decline. As
the fields started using those technologies, the decline rates
accelerated.
At that point I still didn’t understand what the peak oil issue was
all about because I automatically assumed that we had so much oil in
the Middle East that we’ll never have peak oil. But I thought if we
don’t spend a ton of money in the Middle East, we’ll have peak
capacity. And what’s the difference? We have it in the ground but we
can’t use it. So it was probably when I started doing the study on the
world’s giant oil fields that I started glimpsing maybe the Middle East
is an illusion too.
What are the big differences between the demand drops post-1978 and today?
Simmons: They’re as comparable as the Crimean War and the
Vietnam War. I recently heard Leo Drollas and Ed Morse presentations
in which they lamented that “we should have learned from 1979 that high
oil prices kill demand: they always have, they always will.” I have
told people over the last few months that today has no earthly
resemblance to what happened in 1979. When oil prices were still
rising in 1979, the world was seriously rolling out the only new form
of energy in the 20th Century-atomic energy. It had been
building for 15 years and that wasn’t in response to $30 oil. In 1979,
we were still bringing in oil from three of the last great frontiers,
all discovered in 1967-69: Western Siberia, the North Slope of Alaska,
and the North Sea. High oil prices kept those expensive projects
afloat.
Crude oil demand grew from 46 million b/d in 1970 to its
then-all-time high of 62.7 mb in 1979. The enormous swing in
price-from $2 a barrel to $35 a barrel, from 1970 to 1979-didn’t slow
demand. By 1983, demand did drop to 53.3 million b/d. The four major
demand reduction drivers were fuel-switching to nuclear, fuel-switching
to coal, vehicle efficiency and off-shoring heavy industry. So only a
fraction of the decline in demand came from what everyone has said for
two generations: “high oil prices workedÖconsumers changed their
habits.”
With respect to demand today, some of the OECD countries are now
very mature and haven’t been growing their populations or economies.
Japan and parts of Europe are pretty gray, pretty mature, so we
shouldn’t be expecting robust growth in either their economies or in
oil demand.
Over the course of the 12 months preceding the price collapse, when
we had oil going from $70 to $145 and backing off to $120, we had only
a deminimus change in a few of our key demand markets for oil, even
though we were capping off a decade-long rise of 15-fold in oil prices.
That’s a little reminiscent of the 1970s, when oil prices rose 10-fold,
though demand rose until the end. The higher that oil prices went last
year, the more that people who had staked their careers betting this
would never happen said “supply is going to soar, and demand must be
falling.”
Along came June-July-August numbers out of the EIA, which are the
only sort-of-reliable near-term estimates we have on demand. People
started to observe that we’ve finally seen a crack in gasoline demand,
starting to decline year-over-year. All sorts of stories started
circulating how gasoline demand has finally turned down for the first
time since 1990.
In July in Maine, which is peak tourist season, many of the gas
stations we passed were down to one pump in operation. When I asked
why, I was told their supply was being allocated, restricted. At least
one of the distributors had small gas stations on credit watch, since
they were lending them product to the tune of $400,000, leading to
large exposure for skinny margins. So they were limiting supply to
avoid write-offs from dealers that might go bust.
In the spring of 2007, I spoke with Linda Cook at the EIA event in
April. I said that with gasoline stocks at such unbelievably low
levels, we need to be concerned about potential shortages leading to a
panic that people would respond to by topping up their tanks, which
could dry the system dry in two or three days. I asked her if they had
ever considered this, and the need to possibly print up rationing
tickets. She did, and said she was laughed at-”Linda, you’re
hallucinating.” She said she had been noticing that at service stations
in the Beltway area, when she looked at the last purchases on the
pumps, a lot of them were at $5 or $10, rather than filling up. People
were driving around with just-enough gasoline in order to avoid having
to pay for a full tank. Last summer, AAA reported that they had a 17%
increase in their use of tow trucks for people who had run out of gas.
Then came September, and we had the big collapse, because we had two
back-to-back hurricanes. Right after Ike hit, Houston was without
power for the better part of two weeks. Refineries, with their own
generators, were without power just long enough that we had service
stations with outages that spread all across the south, as far up as
Maryland. Only the Atlanta part of the story was covered, other than
by local news, because the national news was being totally dominated by
failures of Lehman Bros., AIG, Merrill Lynch, etc. Had we not had the
financial meltdowns, those other stories would have been covered, then
motorists would probably have topped up their tanks and we would have
run out of gas.
EIA’s weekly data in September was total junk because nobody was
around in the Gulf Coast to measure it. In late October, by the time
they released their monthly report for September, it showed a gasoline
decline of 11%. People were saying, “high prices started this
avalanche, but it’s cascading.”
At the recent Yamani Conference, Paul Horshnell, who does a fabulous
job, said that we’ve seen the worst of the demand destruction in the
US, which clearly had to be impacted by the hurricanes. But when you
look at the IEA’s demand drop for 2009, two-thirds is coming from the
US, based on the assumption that the third quarter wasn’t an aberration
but a trend. Yet if you look at gasoline consumption over the last
five months, gasoline consumption is up 2%, then down 2%, then up
again. Diesel fuel is still down about 10%, but most of that is
exports. Then jet fuel is down 10%. Relative to the price collapse,
you would expect a major drop as opposed to the modulation we’ve
seen. It’s more or less unchanged, vs. a headline story.
But what I’m now sure of is that, in North America-in the only easy
place in the world to stop drilling-we have stopped drilling.
Hopefully we’re getting towards the bottom of the decline, but the
decline has been savage. Around the rest of the world, we’re slowing
down every planned project that is supposed to be getting started, and
a lot of things needed to complete ongoing projects are being put on
hold. There is an enormous effort by the major oil companies to use
this low-price environment to finally get oil services inflation under
control. While there is a lot of lip service going around that their
budgets remain unchanged, the fact of the matter is that they’re
killing their contractors. BP apparently sent out a letter to all their
suppliers saying “BP has a large budget for this time of year, but if
you want part of it drop your costs by 30%.” (04/14/09)
more…